Hedge Funds Outperform Broad Equity Markets in 2005
January 10, 2006 New York, NY Hennessee Group LLC, an adviser to hedge fund investors, today announced that hedge funds advanced as the broad equity markets were flat to negative in December. The Hennessee Hedge Fund Index rose +1.80% (+8.03% YTD). The broad equity market indices were mixed as the S&P 500 increased +0.04% (+4.90% YTD), the Dow Jones Industrial Average was down -0.82% (-0.61% YTD), and the NASDAQ Composite Index lost -1.23% (+1.38% YTD). The bond markets were up in December, as represented by the Lehman Brothers Intermediate Government Corporate Bond Index, which increased +0.63% (+1.57% YTD).
Hedge funds as an asset class outperformed equity and bond markets for December and the year,? said E. Lee Hennessee, Managing Principal of Hennessee Group LLC. ?Thus far, the Fed has orchestrated the most effective withdrawal of monetary stimulus since the 1980s. Equity hedge funds benefited from this as stock research ruled over liquidity driven equity markets for the first time in several years.
The Hennessee Long/Short Equity Index increased +1.51% (+6.98% YTD) in December. Managers utilized their stock selections skills to handily outperform the equity markets, even though the ?December Rally never happened. Most hedge fund managers are seeing new opportunities in large cap stocks, expecting the big cap market averages to hit and sustain new highs in 2006.
The Hennessee Arbitrage/Event Driven Index was up in December, returning +1.33% (+5.30% YTD). Convertible arbitrage managers finished up a turbulent year on a positive note, up +1.06 in December, but ended down -2.20%, the first negative year they have had since 1994 and the worst performing hedge fund strategy in 2005. Volatility remained low, but December saw over $8 billion in new issuance. December was also positive for merger arbitrage managers, posting a +1.10% return and finishing 2005 up +4.79%. Deal flow was slow, mainly due to the holidays, but several deals closed in December, and average deals are yielding an annualized return of 7-8%. Distressed managers finished December with a very strong month, up +2.27%, spurred by airline bonds and Calpine?s hiring of a new CEO.
With a flat yield curve, low volatility, and tight credit spreads, arbitrage managers did not have much to work with, said Charles Gradante, Managing Principal of Hennessee Group LLC. ?Many arbitrageurs believe inflation is more likely to surprise on the downside in the coming months. These same managers reminded us that the yield curve inverted in 1995 and 1998, signaling absolutely nothing.
The Hennessee Global/Macro Index increased +3.04% (+14.27% YTD) in December. The Nikkei continued its run, surpassing 16,000, and gold continued its rise past $530 an ounce before trading lower. Oil moved lower at the beginning of the month, but bounced off of these lows to finish up as the threat of a Russian gas supply cut loomed on January 1. The dollar backed off against the yen and the euro. Most notably, the yield curve inverted and finished the year with the 2 year at 4.41% and the 10 year at 4.39%. This typically indicates a pending recession, but managers do not believe that will be the case this time due to strong manufacturing productivity, solid company balance sheets, and low unemployment.
Macro hedge fund managers have indicated that they are long gold, commodities, and Japanese equities, while remaining short the U.S. dollar and credit spreads, stated Mr. Gradante.
About the Hennessee Group LLC
Hennessee Group LLC is a Registered Investment Adviser that consults direct investors in hedge funds on asset allocation, manager selection, and ongoing monitoring of hedge fund managers. Hennessee Group LLC is not a tracker of hedge funds. The Hennessee Hedge Fund Indices are for the sole purpose of benchmarking individual hedge fund manager performance. The Hennessee Group does not sell a hedge fund-of-funds product nor does it market individual hedge fund managers.
Description of Hennessee Hedge Fund Indices
The Hennessee Hedge Fund Indices are calculated from performance data supplied by a diversified group of over 900 hedge funds monitored by the Hennessee Group LLC. The Hennessee Hedge Fund Index is an equally weighted average of the funds in the Hennessee Hedge Fund Indices . The funds in the Hennessee Hedge Fund Index are derived from the Hennessee Group?s database of over 3,500 hedge funds and are net of fees and unaudited. Past performance is no guarantee of future returns. ALL RIGHTS RESERVED. This material is for general information only and is not an offer or solicitation to buy or sell any security including any interest in a hedge fund.